Six Tips to Maximize a High-Yield Savings Account

• A high-yield savings account is similar to a standard savings account but pays a much higher interest rate. 
• According to the Federal Deposit Insurance Corporation (FDIC), the national average annual percentage yield on savings accounts is 0.24%. However, you can find high-yield savings accounts that pay more than 4% APY.
• High-yield savings accounts are federally insured, just like standard bank accounts, making them a safe option for earning increasing interest earnings.

A high-yield savings account is a type of bank account paying an interest rate that is significantly higher than a standard savings account, typically 20 to 25 times the national average of a standard savings account. This difference in rates can yield interest earnings several orders of magnitude larger than if those same funds were held in a standard savings account.

For example, if you have $5,000 in savings at your local bank or credit union, your interest earnings for the full year would total $12, based on the national average interest rate of 0.24 percent. However, if that same $5,000 were instead invested in a high-yield savings account earning four percent, your interest earnings after one year would total $200.

High-yield savings accounts are usually available at banks that already offer savings and checking accounts. However, online banks traditionally offer higher rates than brick-and-mortar institutions.

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Deciding How Much to Invest in a High-Yield Savings Account

Given the potential restrictions of a high-yield savings account in terms of minimum duration and amount of funds held in the account, a high-yield savings account should comprise only one spoke of your overall financial investment strategy.

High-yield savings accounts can work exceptionally well when savings towards a goal, such as a down payment on a mortgage, start-up funds for a business or investment property, or a vacation. In addition, high-yield savings tend to be less risky than stocks or index funds that can lose value, thus providing the additional benefit that your underlying principal will not be eroded.

If you don’t have a specific savings goal, then another use for a high-yield savings account is to hold surplus cash that is periodically swept from a low-interest-rate checking or savings account to a higher-interest-rate alternative. Moving extra funds into a high-yield account can add hundreds of dollars a year to your interest that you wouldn’t otherwise earn.

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How to Select a High-Yield Savings Account

Whether you’re researching online high-yield savings accounts or are evaluating options offered by your local bank or credit union, it's always wise to begin comparison shopping early. Interest rates and fees can vary across banks, and those differences can reduce your net earnings over time. Here’s a cheat sheet of what to look for and compare when shopping around for high-yield savings accounts:

1. Required Initial Deposit

The very first question you’ll want answered is how much is required to open the account. For example, if the interest rate offered on a new high-yield account is five percent but requires a $25,000 initial deposit in exchange, that account will be out of your league if you don’t have or aren’t comfortable parking, $25,000 in this account.

2. Minimum Balance Required

Second, on your cheat sheet is to determine the amount of money that must remain in the account on an ongoing basis, also called the minimum balance. As with the initial deposit amount, you’ll want to be sure that you can always meet this minimum threshold.  Not meeting this threshold can incur fees that outstrip any interest earnings.

3. Interest Rate

Once you’ve found several institutions that meet your initial deposit and minimum balance criteria, the next is to zero in on the interest rate offered by each bank. If a bank offers an interest rate that is astonishingly high relative to the market, ask if this rate is an introductory promotional rate, and if so, how long it lasts.

Also, ask if the promotional rate applies to all funds deposited or just a capped amount. For example, if the promotional rate is 5 percent for one year, it is offered on only the first $500 of funds deposited. Then, the interest earnings on your $500 deposit will be $25 but much lower on all subsequent deposits. In short, always read the fine print.

4. Fees

What fees does the bank or credit union charge on this account, and how can you avoid them?  For instance, a minimum balance fee can be avoided with emails, text messages, and other notifications letting you know when you are close to falling below the threshold. Likewise, signing up for an online bank statement can avoid a monthly paper statement fee. Ask for a list of all fees and the corresponding amounts.

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5. Options and Restrictions on Accessing Your Money

High-yield savings accounts sometimes have a limit on the number of withdrawals that can be made in any given month before fees are incurred, so ask if there are any restrictions on how frequently you access the account. Likewise, check if an ATM or debit card is provided to facilitate account withdrawals.

6. How Frequently is Interest Calculated

Banks can stipulate how frequently they will calculate the interest earnings on an account. This frequency is called compounding. Interest can compound daily, monthly, quarterly, semiannually, or annually. The more frequently the bank calculates interest earnings or compounds interest, the higher your yield and interest earnings.

How to Open a High-Yield Savings Account

To open a high-yield account, you will need to provide the same information as opening a standard checking or savings account:

• Social security number
• Government-issued photo ID such as a driver’s license or passport
• Address and phone number
• Your primary bank account
• The source of funds to open the account—for instance, a bank check or cashier's check.

The Money Wrap-Up 

A high-yield savings account can greatly increase your APY (Annual Percentage Yield) while keeping your funds safe and federally insured in a bank account. In addition, high-yield accounts often require higher opening deposits and minimum balances than standard bank accounts. Therefore, they are an excellent supplement to a standard account that funds daily bills.

Do your homework and make banks work for your money by comparing balance requirements and restrictions. Most of all, choose an account that will meet your savings and investment needs and won’t cost you more in fees than you make in interest.